Preferreds Gain Attention as Fed on Pause | ETF Trends

By Coulter Regal via via

With interest rates low and the Federal Reserve (Fed) set to stay on pause through year-end, income-focused investors are expanding their search for yield. One area that has attracted attention in recent months is the preferred securities category. Since the Fed first announced a pause on rate hikes towards the end of January, U.S. preferred stock ETFs have seen $1.4 billion worth of net flows.1 However, with a large percentage of the preferred securities’ allocations made up of banks and other traditional financial companies, investors may be missing opportunities for income in preferreds outside of financials.

The Current Market Environment Opens the Door for Preferreds

Since reaching a peak of 3.2% in November 2018, the yield on the U.S. 10 Year Treasury has fallen by over 70 basis points.As yields fall, income investors seeking the right mix of income producing assets may want to consider preferreds as a way to maintain income generation, while experiencing the potential for greater price stability than common stocks and more favorable tax treatment than bonds.

Preferreds have historically offered higher yields than both common stock and senior debt. Moreover, many pay qualified dividends, which are taxed at the capital gains rate rather than ordinary income, increasing the after-tax yield advantage of preferreds over traditional debt.

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